Max Levchin: Online Fraud-Buster

Position: Chief Technical Officer, PayPal

Contribution: Architect of the antifraud component of PayPal's dominant electronic payment network

Challenge: Keeping up with -- and snuffing out -- the efforts of potential thieves to defraud online merchants who use PayPal's e-commerce software

In the summer blockbuster Minority Report, Tom Cruise plays a "pre-crime" detective whose job is to catch evildoers before they break the law. It's a sexy concept, but implausible. Or is it? Not to Max Levchin, who at the tender age of 27 has made his life's work thwarting online fraudsters before they take the cash and run.

PayPal (PYPL ) has grown so quickly because its concept is so simple. Essentially, it's an electronic version of Western Union. PayPal's software allows consumers to send and receive money over the Internet just by registering an e-mail address and credit-card number. PayPal acts as an intermediary -- charging the buyer's account and crediting the the receiver's.

The e-payment company has mounted one of the few initial public offerings so far in 2002, raising $70.2 million in an issue that debuted in February. And in July, online-auction giant eBay agreed to buy PayPal for $1.5 billion in stock. That purchase will be completed soon (a shareholder vote is scheduled for Oct. 3), making Levchin one of the few Internet millionaires to be coined in the wake of the dot-com bust.


  Levchin is the brain behind the PayPal software's ability to spot and stop illegal payments -- most often, those made with fake or stolen credit cards -- while at the same time letting honest shoppers proceed with their purchases. One program, dubbed "Igor," alerts PayPal to freeze suspicious accounts or halt money transfers that appear to be headed for dubious destinations.

Another component performs real-time background checks on purchasers with unusual patterns of behavior -- such as small transfers of money to the same account at regular intervals. "If we're successful, it's like pre-crime," Levchin says. "We try to figure out what they're going to do so we can stop them before or in the act."

That idea is starting to pay off. The FBI has enlisted Igor to help detect fraudulent wire transfers. And PayPal is adding 28,000 accounts a day to its list of more than 17 million users in 38 countries. Its sales and profits are also booming. In the second quarter ended June 30, revenues more than doubled, to $53.8 million vs. $19.7 million a year earlier. PayPal turned a profit of $529,000, vs. a year-earlier loss of $27.7 million.


  Born in Kiev, Russia, Levchin emigrated to Chicago with his family in 1991. He attended public high school, then in 1997 got his undergraduate degree in computer science from the University of Illinois at Urbana/Champaign -- the same school where Netscape founder Marc Andreesen got his start.

In 1998, Levchin, along with President Peter Thiel, founded PayPal. The service launched in November, 1999, offering $10 in cash to anyone who joined. Early on, the duo hitched their wagon to eBay, which now provides PayPal with about 60% of its customers.

By selling out to eBay, Levchin almost certainly has guaranteed a prosperous future for his brainchild, whose stock is now around $22, off its 52-week high of $30.48 but well above its 52-week low of $12. Indeed, after investing in PayPal, eBay abandoned its own rival system for processing purchases.

The merger can only help Levchin achieve his goal of creating the perfect -- and impregnable -- Web-purchasing system. Among other things, he says, the more data he has at his fingertips, the better. "These crooks are intelligent, but they leave clues," he says. "I'm the Sherlock Holmes of the Internet Underground."

By Jane Black in New York

Before it's here, it's on the Bloomberg Terminal.